Tag Archives: Harvard Business Review

Amazon margins and online sales tax

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Amazon reported Q4 earnings on Tuesday.  Q4 revenues soared to $21 billion, up 22% Y-o-Y.  Net income was a dramatically different story at $97 million.  Looking at the net margin, it comes out to about 0.5%.  It reminds you of the imaginary quote “Don’t worry about the profits, we will make it up on volume.”

What’s up with the margin? Is it okay to only earn 1/2 of a penny on each dollar?  Amazon CEO Jeff Bezos was on a recent Harvard Business Review podcast and was asked that exact question. His response was pretty sensible,

“Percentage margins are not one of the things we are seeking to optimize. It’s the absolute dollar-free cash flow per share that you want to maximize, and if you can do that by lowering margins, we would do that. So if you could take the free cash flow, that’s something that investors can spend. Investors can’t spend percentage margins.”

Amazon - Sales Tax - BezosBezos is no fool.  He is an ex-hedge fund manager, and Fortune Magazine’s 2012 Businessperson of the year.  He holds a long-term strategy and has consistently made bold, strategic, and industry-altering moves.  He has also done well for investors.  Apparently, Bezos has delivered about 12,000% shareholder return while CEO.

Analysts like the stock.  As of today’s close, AMZN was $272.  On Finviz, you can see that most analysts reiterated their ratings with a target price between $260-$335.

What about sales tax?   My primary questions is about sales tax.  If you compared Amazon’s net margin % with the average sales tax % (that is not getting collected by Amazon, or the Government) it’s not a pretty picture.  If customers had sales tax added to purchases, would they buy so much stuff online?  If AMZN had to hypothetically pay state taxes (after operating or net income), they would be unprofitable.

AMZN vs sales tax

States want their taxes.  Apparently 45 states have sales or use tax that should apply to online purchases.  Either the retailer should collect the sales tax (which most don’t) or the buyer should voluntarily pay the tax on their tax form here.  The majority of online retailers don’t collect sales taxes with the order because they do not have a physical presence (nexus) in the state of the buyer.  Here is a good explanation of sales tax on the internet.

I was curious, so I dug up a state tax form.  This one is from Virginia (pdf) and it looks like they really do want the tax money from the online purchases. Un-fun.

The use tax applies to the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax was not paid at the time of purchase.

Amazon know this.  They have a section of their website that gives instructions to customers and tries to clarify the mystery surrounding taxes for online purchases.

Just as often, they lobby against the require to collect sales tax at the time of purchase.  Naturally, they would like to leave it to the consumer (who may, or may not do it).   Amazon went back and forth with the California legislature, but lost.  Amazon started collecting taxes on purchases made from California in September of 2012.  Unsurprisingly, people started to stock up on things from Amazon before the tax-collection started.

The looming deadline prompted San Diego artist John Purlia to finally buy that Samsung flat-screen television that had been sitting in his Amazon shopping cart for months

Inevitably, more sales tax will be collected online.  States and local municipalities are dirt poor.  Tax revenues is shrinking.  Some of their bonds are junk status.  States want that revenue and they will argue (rightly) that this levels the playing field for local retailers.

I am no fan of taxes, but the law already exists.  From the state’s point of view Amazon will do a better job of collecting sales taxes than relying on 1) millions of people in the US 2) filing their taxes 3) keep track of their purchases 4) and doing it appropriately.

It’s a headwind for Amazon and other retailers.  If Amazon has to collect that tax from all of its millions of consumers, sales will go down.  That said, I am avid shopper on Amazon and will continue to use their website, reviews and free 2 day shipping with Prime.  Even though I don’t believe the 0.5% net income is a sustainable business model, I will not be betting against Bezos or the stock.  I will not be writing naked calls.

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Why consultants love best practices

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Management consultants use the phrase “best practices” often.  Perhaps too often. You will see that magical phrase mentioned numerous times in white papers and research on these websites: Boston Consulting Group, Deloitte, PWC and Accenture.  A few pictures that help explain why best practices are so popular with consultants and clients.

Best practices are like good hiking trails. . . Hiking Trail - Consulting blog

. . . they are market-tested:  Many of these best practices have been around for years.  Clients have a sense of comfort that they are following a well-worn path.  You don’t have to read the most recent article in Harvard Business Review to know that the Toyota Management System for lean production still works today.

. . . they are repeatable: Consulting firms work with so many clients that they see what works and what does not.  Clients think they are unique (n=1), but a lot of the back-office functions are more alike than different.  No reason to “re-invent the wheel” on mundane processes.  Better to just follow the trail that is already there.

. . . they save time:  It might not be perfect or holistic, but best practices will get you most of the way there.  Not all clients want to spend the time or the money to dig into the problem.  They want the 80% solution.

Best practices are like powerful telescopes. . .

Telescope - Consulting blog

. . . they appeal to the curious:  Clients want insight into what competitors and other leading companies are doing.  There is a fine line between best practices, benchmarking, competitive intelligence – but the basic conformist tendency is the same: “Show me what other people doing.”

. . . they help you see farther:  Having access to best practices or other “special sauce” positions the management consultant as an expert who can bring new and external insights.  While the client can draw on 10-20 years of personal experience, the consultant can tap into the firm’s collective history (for Trekkie fans, think of the BORG) and dig up example after example of previous client projects on the same topic.

Danger: Best practices can also be like cookie cutters. .  .

Cookie Cutter - Consulting Blog

  • If abused or misunderstood, best practices can become the lazy person’s way to propose a quick, often ill-fitting solution without thinking through the problem
  • Best practices are excellent tools, but you cannot “copy” your way to operational excellence or strategic differentiation.  The most you will get is parity
  • Best practices cannot be simply a cut/paste into an organization.  They do not work without the necessary leadership, culture, resources, IT systems etc. . .
  • Large ERP implementations (read: SAP, Oracle etc) force companies to adopt industry-standard processes.  Whether these are best practices is up for debate\

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